Fringe Banking vs Traditional Banking: Is there really a difference?

Recently there has been an increase in attention to the impact of payday lenders, a form of fringe banking, on the neighborhoods in which they are located. Fringe banking can include check cashers, cash advancements on tax refunds, pawnshops and more recently car title loans. Payday lenders are newer developments that give short-term loans for the amount of a customer’s paycheck for a fee. In order to receive the short-term loan the customer writes a postdated check to the lender for the amount of the loan, plus fees and interest. The lender then cashes the postdated check after the customer’s paycheck has been deposited into their checking account (Graves, 2003). Payday lenders argue that they offer a convenient service to assist customers with unanticipated expenses, while critics argue they are an entry into predatory loaning that encourages a spiral of debt (Graves, 2003; Kubrin, Squires, Graves & Ousey, 2011; Washington, 2006).

Kubrin and colleagues (2011) conducted research in Seattle on the affect of payday lenders on neighborhood levels of crime. They found that payday lenders were positively and significantly related to violent and property crimes, even when controlling for neighborhood characteristics that have frequently been associated with crime. More recently, Lee, Gainey and Triplett (2013) examined the effect of fringe banking on neighborhood crimes in Norfolk, Virginia. Data from 2009, showed that the number of payday lenders in a neighborhood was associated with an increase in the property crime rate, for over 20 crimes. The results for the violent crime rate were close to statistical significance, suggesting an increase in the 2010 violent crime rate of 5 crimes.

An unexpected finding of this research was the positive relationship found between both property and violent crime rates and the number of banks in a neighborhood. The article suggests the possibility of “busy places”, of the connection between banks and increased rates of crime, meaning that banks are located in areas that are busier and that is the reason for the increased rates of crime. However, there are other possible explanations worthy of consideration. For example, traditional banking institutions finance many of the large payday lenders. Further a recent piece on NPR featured the loans offered by traditional banks that mirror the predatory services offered by payday lenders.

A report by National People’s Action (NPA) states that many of the large national banks such as Wells Fargo, Bank of America, and PNC finance many of the largest payday lending companies (2010). More specifically, mainstream banks have supplied over $1.5 billion in credit to support payday lenders; in other words a third of the operation costs and payday loans are financed by these major traditional banks. When the major traditional banks are financially supporting the fringe banking options, it creates a catch 22. Customers that cannot afford traditional banking services seek to have their banking needs met elsewhere, however if the major banks are funding the options available, it is likely that the major banks are the ones who are still benefiting.

More recently, news reports have began to shed light on the loans that major traditional banks offer that are very similar to those offered by payday lenders. Similar to payday lenders, these loans sometimes called “deposit advances” have outrageous costs. Based on the average time of a deposit advance of ten days, the annul percentage rate (APR) is 365%; which is substantially higher than other small loan options such as credit cards or personal loans (Borné, Frank, Smith & Schloemer, 2011). A recent story on NPR focused on the experience of Annette Smith, a grandmother who received a deposit advance on her Social Security benefits from her bank, Wells Fargo, to cover repairs for her truck (Benincasa, 2013). The original deposit advance of $500 was followed by 63 additional deposit advances, and over a period of five years, she ended up paying nearly $3,000 in fees. She was told she would be charged a $50 fee for each loan, which overtime resulted in 180% interest (Benincasa, 2013). In Smith’s words, “The bank is where you go, and you wouldn’t be taken advantage of, you would be helped. And because they called it a service, and they called it, you know, a fee, I trusted them.” Unfortunately, Smith’s story is not unique. Borné and her colleagues (2011) at the Center for Responsible Lending, have found that roughly a forth of those who received deposit advances from banks were recipients of Social Security benefits.

When considering the actions of banks such as these (not even getting into their role in the housing mortgage crisis), it seems surprising that there has been little focus on the impact of financial institutions on neighborhoods and crime. As highlighted in the first half of this post, the fringe banking industry has been found to have negative affects on neighborhood crime. However, recently investigations into traditional banks suggest that they may not be much better.

Benincasa, R. (2013, December 5). Banks come under fire for filling in the payday loan gap. National Public Radio. Retrieved from http://www.npr.org/2013/12/05/247182721/banks-fill-in-the-payday-loan- gap